Friday, March 23, 2007

Using Intraday New Highs And Lows To Anticipate Stock Market Turns

In my post on five principles of short-term trading, I mentioned that strong markets tend to follow through on their moves in the short run, while weaker rises and declines are vulnerable to reversal. I've especially found this principle to be helpful with respect to new highs and new lows among stocks. This is why I track the number of stocks that make fresh 20-day highs and 20-day lows each day in the Trading Psychology Weblog. All other things being equal, a market with expanding new highs will continue to rise; a market with expanding new lows will be vulnerable to further decline.

This makes divergences in the new high/low data particularly informative. For example, when the S&P 500 Index hit its recent low on March 14th, we had 1894 stocks making 20-day lows in the NYSE, ASE, and NASDAQ. On March 5th, however, the number of 20-day lows was 3274. The expansion of new lows on the 5th told me we probably had more downside to go. The shrinking of new lows on the 14th indicated that many stocks were no longer participating on the downside--a pattern that often leads to reversal.

So how about tracking new highs and new lows on an intraday basis?

The chart above for yesterday's market tracks 30-minute new highs minus new lows for the 40 stocks in the 8 S&P sectors that I follow for Dollar Volume Flow. We use closing five-minute prices for the new high/low data (charted in pink) and plot the difference between new highs and lows vs. the S&P 500 Index (SPY; in dark blue). The light blue arrows identify intraday areas where SPY moved higher/lower, but we didn't get a commensurate expansion/contraction in the new highs minus lows. As a whole, these divergences do a nice job of identifying potential meaningful intraday reversal points.

The value of using these 40 stocks is that they are evenly spread across the S&P 500 sectors, which enables us to track situations in which one or more sectors are no longer participating in moves. The stocks are very highly weighted within their sectors, as those are represented by the sector Spyders. Here are the sectors, the Spyder ETFs, and the stocks used for the high/low calculations:

These stocks can be used in a watch list for a screening program (such as Trade Ideas), which can calculate the new highs and lows for you on the fly. My own calculations came from dumping the data from my real-time datafeed to Excel.

Note one other interesting characteristic of the intraday new high/low data: On a range bound day such as yesterday, we'll spend a relatively even amount of time above and below the zero line. When we see consistent more new highs than lows or vice versa, that's when we're likely to have a trend. Similarly, on good breakout moves, we'll see many stocks simultaneously register new highs or lows. That's what happened Wednesday following the Fed announcement: all 40 stocks immediately made fresh 30-min highs and then sustained those. In yesterday's market, we don't see such extreme levels of new highs/lows. Rather, at range extremes, we tend to see a drying up of new highs or lows.

Of course, we could create other groupings of stocks to monitor for those who trade small caps or NASDAQ stocks. We could also create larger, sector-based baskets of stocks for those trading the sector ETFs and track new highs and lows specific to the sectors. For that reason, the intraday new highs and lows are a particularly flexible analytical tool for the short-term trader.

No, Market Delta would not generate cumulative data such as new highs and lows across stocks. Rather, it parcels out volume by bid and offer within a particular trading instrument. Different application.

As noted on the Y-axes of the chart and in the 4th paragraph of the post, the pink is the new highs minus lows every 5 min and the dark blue is the SPY on the same basis. The lighter blue arrows show divergences.

I found your website after purchasing your book "The Psychology of Trading" which I am still reading, great book. I am amazed at the quality,volume and depth of the information you post and the work this requires. Thanks for sharing. Larry

You raise an important question; thanks for the comment. I don't at all necessarily recommend that all traders trade all strategies or use all the tools I describe. I try to identify trading approaches that have promise, and then it's up to traders to see which ones make sense to them and might be adapted to their needs and interests. I would recommend that traders focus on just one or two core strategies and build their competence with those before tackling others.

As for data sources, the NYSE TICK is available via most real time feeds and I create my cumulative TICK data in Excel on my own. Ditto dollar volume flow: I get the raw data from my real time feed (RealTick) and do the calculations in Excel. VWAP and other measures are also calculated on my own with raw data from e-Signal or RealTick.

Hi BrettAnother great intraday indicator. Have you tried to look at new high low indicator with dollar flow indicator at breakout points on an intraday basis? I wonder if these 2 indicators couyld be used to complement each other.

I do think you could use ETFs for this purpose. I prefer completely unweighted representation of the markets, and even ETFs have strong weightings. Indeed, I think you could probably use a basket of stocks within a sector to track strength and weakness of the ETF.

It all depends on what you're trading. The 40 stocks are taken from the S&P 500 universe. If you took all stocks in the U.S. equity universe (as I do in the 20-day new highs-low data), you'd have a better representation of the broad market (NYSE Composite, etc). And, I suspect, the data from equities in overseas bourses would be helpful in tracking strength and weakness in those markets.

Hi Brett, many of your posts are very insightful and useful, but I think this one is particularly great. I added this net high/low indicator calculation to my custom trading program shortly after your post, and have found it very useful as a leading indicator of market sentiment. It doesn't lead by much - a few minutes at most - but that's enough to make a real difference when I'm deciding on both entries and exits.

In response to Chahid's very good point about the number of tools one needs and the cost of all those tools, I would say that if you have software development skill, you can accomplish quite a lot with a real-time feed (such as eSignal) and some programming. My custom program is fairly complex, but probably overkill for many people's needs. You could accomplish quite a lot with eSignal and some Excel macros.

Today, I tried to recreate this indicator using TradeIdeas data downloaded to an Excel spreadsheet.

My charts do not have the datapoints that you generally have. I tracked the 30 minute highs and lows from TradeIdeas for the 40 stocks you follow...Are you using 5 minute highs and lows instead of 30 minute highs and lows (as defined by TradeIdeas)? If I had used the 5 min highs and lows, I would get a wider range of datapoints (highs minus lows). Let me know what you think when you get a chance.

I'm sorry but this will be my last question regarding this article. In the article, you say you are tracking the 30 min highs and lows using 5 min closing data. I tried to do same thing but got a different chart. It appears to me that in this chart you are using 5 min highs and lows and not 30 min highs and lows. Am I wrong? Can you explain this a little further?

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and The Daily Trading Coach (Wiley, 2009) with an interest in using historical patterns in markets to find a trading edge. I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab).